ISM non-manufacturing index shows growth in May

Non-manufacturing activity continued to remain in growth territory, according to data released by the Institute for Supply Management (ISM) today.

The ISM’s monthly Non-Manufacturing Report on Business said that the index used by the ISM to measure non-manufacturing growth—known as the NMI—was 53.7 in May, rising 0.6 percent from April, which was down 1.3 percent compared to March. May’s PMI is 1.0 percent higher than the 12-month average of 52.7. Non-manufacturing activity increased for the 41st consecutive month in May, added the ISM.

A reading above 50 represents growth. Yesterday, the ISM reported that the PMI, the index on which the ISM’s Manufacturing Report on Business is based on, fell 1.7 percent to 49.0 in May. This is below the 12-month average of 51.1.

Including the PMI, three of the report’s four key metrics were up in May. Business Activity/Production showed a 1.5 percent increase at 56.5, and New Orders were up 1.5 percent at 56.0. Employment was down 1.9 percent to 50.1.

“There is still a sense of uncertainty about what the long-term outlook is, but the majority of respondents for the report seemed to feel that things are pretty good and improving year over year,” said Tony Nieves, chair of the ISM’s Non-Manufacturing Business Survey Committee, in an interview. “A bit of a lack of confidence in the economy has impacted the Employment index, as companies came out of the gate pretty fast on the hiring side in early 2013 so this might be a bit of a leveling off. It looks like June will be a pivotal month in terms of where things go from here in terms of hiring. We may see an uptick in retail but we need to see what happens, because as employment goes is how this sector goes.”

The current rates for New Orders and Business Activity/Production seem to be sustainable, according to Nieves, but he emphasized that employment growth could make a real difference for future growth.

Non-manufacturing inventories were down 4.5 percent to 51.5 in May, representing what Nieves called an inventory burn off and is directly related to business activity strength.

“With the inventories going down to where they are, it leaves open the question of if there is going to be a major need to replenish or if we are at strained capacity right now,” said Nieves. “At this point, we really don’t know.”

May prices were down 0.1 percent to 51.1. Nieves explained there is not pricing power in the manufacturing sector out there at the moment, and it still remains to be seen what direction prices for fuel and petroleum-based products head in, especially with summer in full swing and more people going on vacations in the coming months, which he said could lead to higher prices.

Assuming the current economic landscape remains intact, Nieves said that the PMI could stay in its current mid-50’s range for the foreseeable future.

“If we see an uptick in employment, we will grow even with what we are seeing on the manufacturing side,” he said. “Don’t forget that even the limited manufacturing we do in this country is affected by global markets, and Europe is still struggling. And we see that with exports (down 3.5 percent to 50.0) and imports (down 9.0 percent to 49.5). We need to see how that could affect the over all domestic economy should that continue.”

Respondent comments in the report ranged from cautious, due to slower sales and a tight job market to modest improvement in non-manufacturing.

A wholesale trade sector respondent said that “[t]he flat sequential sales — which began in January 2012 — are still continuing. At this point, we do not predict any lift in the foreseeable future. We do not see any negatives; it appears that business has reached its ‘cruising altitude’ and is staying there.”

Wholesale intermediaries touch links in the supply chain like no other, noted Nieves, and have a good feel as to what the business environment is about at any given time.